Coming (Back) to America: Why Companies are Reshoring Manufacturing Operations

August 12, 2013 at 9:25 AMHeidi Bragg

About ten years ago, labor costs in developing nations were low enough that business owners outsourced many of America’s manufacturing jobs to countries like China, India, and Mexico, to name a few. The Center for American Progress quotes a U.S. Department of Commerce statistic that in the 2000s, “U.S. multinational corporations, the big brand-name companies that employ a fifth of all American workers… cut their work forces in the U.S. by 2.9 million during the 2000s while increasing employment overseas by 2.4 million.” A significant number of domestic jobs moved to countries with lower labor costs.

However, the economic circumstances of these countries have changed dramatically in the intervening years. Labor costs in China have risen to record highs. Some manufacturers have found that issues with quality control and the inability to quickly implement product design changes have left them lagging behind. Earlier this year, Zacks Equity Research stated the following: “One survey by the Boston Consulting Group (showed) that 37% of large American employers were contemplating transfer of manufacturing from China to the U.S.” Why are some companies, from large multinationals to small businesses, moving operations back home?

Increased overseas labor costs are one significant factor. Earlier this year, CNBC quoted Steve Maurer, managing director of AlixPartners, as saying, "The Chinese manufacturing cost advantage has eroded dramatically in the last few years. If you go back to 2005, it was pretty common for landed cost from China to be 25 to 30 percent less than the cost of manufacturing in the United States. Based on our analysis, two-thirds of that gap has closed." Maurer continued, “If trends continue, the China cost is going to be on par with U.S. cost in the next four to five years.” As labor savings from overseas production decrease, firms are unwilling to tolerate the other undesirable effects of manufacturing outside the country.

The cost and logistical issues involved in transporting goods from overseas production facilities to the U.S. are also giving business owners pause. As energy prices in the U.S. decrease (due to newer technologies and increased domestic oil production), U.S.-based firms can realize extensive cost savings by manufacturing their good closer to home, even if labor costs are somewhat higher. Also, political stability and established transportation infrastructure ensure that supply and distribution channels function more efficiently.

Having production facilities overseas requires significant oversight in order to maintain quality control. Some companies have discovered that in addition to decreased quality of existing product designs, the ability to quickly implement changes and innovations is hampered by distance, language difficulties, and the lack of highly skilled laborers. An article in The Economist describes the experiences of ET Water Systems, a start-up from California that builds irrigation devices for businesses. Along with many other firms, ET Water Systems moved their manufacturing operations overseas in 2005. Over the next five years, however, “ … Innovation suffered from the distance between manufacturing and design, and quality became a problem, too.” CEO Mark Coopersmith then re-evaluated the differences between domestic and overseas production. “(Coopersmith) was amazed to find that California was only about 10% more expensive than China. And that was just on the immediate numbers, without allowing for the intangible benefits of making the devices almost next door.” Once ET Water Systems moved production back to California, the ability to directly supervise production saved both time and money.

Putting a “Made in the U.S.A” label on consumer goods can also lead to increased sales. Apparel company Karen Kane moved most of its production back to the U.S. after dealing with quality issues, long lead times, and delays for shipments. Besides alleviating these problems, the company noticed that, “Last year, Karen Kane dresses, blouses and jackets promoted with Made-in-USA posters at Dillard's department store posted 15% higher sales than similar non-promoted clothing” (USA Today, July 5, 2013). Many consumers prefer to purchase goods produced in America, and some are even willing to pay more for them.

As the world economy changes and workers in developing nations demand higher pay and more benefits, and as economic conditions improve domestically, more and more companies will consider moving their manufacturing operations back to the U.S. In fact, according to the Denver Business Journal, “While reshoring has accounted for only about 50,000 jobs returning to U.S. soil since 2009, that represents about 10 percent of all new manufacturing jobs created in the last three years. Experts predict the rate of reshoring to increase substantially in the next 10 years.”

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